Fund flows complicate national economic policy targets.

The crisis started to turn the suggested measures considered heterodox in the past into a piece of the economic orthodoxy. What used to be extraordinary became normal: "Reining became unable to control the horse." Now is the time to take new measures. For the time being the new normal has been hindering fund inflows towards developing countries like Turkey. And the decision Central Bank of the Republic of Turkey (CBRT) took the day before is in harmony with this 'new normal'. The CBRT has taken the right action. So, those following the debates at the G20 summit, please join me down the article. This is how I see the events.

United States of America (USA) is the largest economy of the world. I also mentioned that USA is by far the biggest economy with its US$14 trillion GDP. Yet, US economy has not recovered from the crisis with a dynamic pace. And if the US economy does not turn around, world economy will not be likely to recover. US economy is a concern for all of us. This has pushed the US rulers to prepare a new US$600 billion stimulus package. What is tried to be done here is to transfer US$600 billion of the government debt securities (GDSs) in the portfolios of banks, households and foreign investors to the FED's portfolio. The purpose is to stimulate domestic demand with the help of the resultant liquidity injection. This way banks will be able to extend more consumer loans offsetting the drop in credit volume. The assumption made here is that consumers and small and medium sized enterprises for instance fail to access liquidity due to problems in credit supply. Indeed, this is a debatable assumption.

Those who claim that this measure will not manage to ensure the desired stimulation in domestic demand believe that the measure will actually accelerate fund outflows. Since FED's operation will reduce further the returns on US GDSs, those selling of US GDSs will switch more rapidly to the GDSs of other countries. In the end, demand for US dollars will decrease and demand for other countries' currencies will increase, leading to depreciation of dollars. US policy will fail to fulfill the declared target and the operation will only provide the depreciation of US dollars. I heard the best anecdote on the issue from Sureyya Serdengeçti, the former governor of the CBRT when we were chatting on it at TEPAV.

The anecdote takes place in 1998 at Tokyo. Serdengeçti visits Bank of Japan in a delegation. The Governor is fixed at the screen of his computer. Then is the time of prolonged economic depression in Japan. The Governor starts talking, with his eyes on the screen. "I am waiting for the opening of the US market" he says. "Yesterday we injected liquidity to the market to stimulate domestic demand. I am wondering how much of the liquidity will fly to US market." I think this anecdote successfully summarizes the current state and the ongoing economic policy debates.

Fund flows complicate national economic policy targets. This was the case also in the past. But then national economic policy targets were not associated with the US economy. It today is. And under these circumstances policy coordination at the G20 platform becomes the main phenomenon. As raining fails to control the horse, capital controls become to occupy the agenda.

Then where does the problem lie? The problem lies within the following questions: Why did the US not bring up the issue in the G20 and open it to debate before actually taking the measure? The issue is a problem for all of us, more than it was in the Iraq case. Then why did the US act as if the issue was ex parte?  I believe this is the problem. The attitude of the US is no different than that in Iraq.

If the G20 fails to turn into a policy coordination mechanism, we should be prepared for more trouble.

This commentary was published in Radikal daily on 13.11.2010